Pollution Control Effort at China's River Borders: When Does Free Riding Cease?

NBER Working Paper No. 19620Issued in November 2013NBER Program(s): EEEPEPOL

At political boundaries, local leaders often have weak incentives to reduce polluting activity because the social costs are borne by downstream neighbors. This paper exploits a natural experiment set in China in which the central government changed the local political promotion criteria and hence incentivized local officials to reduce border pollution along specific criteria. Using a difference in difference approach, we document evidence of pollution progress with respect to targeted criteria at river boundaries. Other indicators of water quality, not targeted by the central government, do not improve after the regime shift. Using data on the economic geography of key industrial water polluters, we explore possible mechanisms.

So, our study builds on Hilary Sigman's classic AER paper where we demonstrate the role of leaders and their power in China to change the status quo. As usual, the key issue focuses on incentives. What incentives does the leader face to address the issue? Are there unintended consequences of the new policy choices that are made?